Prices of many metals, minerals could jump

A shortage of metal and mineral exploration will create a “severe supply constraint,” causing prices to jump to new highs, according to a paper released Tuesday by professional services firm Ernst & Young.

TORONTO — A shortage of metal and mineral exploration will create a “severe supply constraint,” causing prices to jump to new highs, according to a paper released Tuesday by professional services firm Ernst & Young.

Many miners have essentially stopped exploration activities, a decision that will lead to shortages in “a few years time” when the global economy recovers, the paper says.

Because of the depletion of existing mines and the length of time required to bring on new projects, prices could “soar to new heights.”

“What we’re seeing now . . . is an overall unwillingness to take on additional risk,” stated Tom Whelan, leader of Ernst & Young’s Canadian mining and metals practice.

“This makes immediate sense, of course, but there’s another side to the story, which is the predicted and inevitable scramble for scarce resources when the global economy recovers.”

The paper also found that the recession has divided Canada’s mining industry into three camps: opportunists, innovators and survivors.

Major mining firms with strong balance sheets are usually the opportunists, looking for low-cost acquisitions. But “valuation impasses that often prove too difficult to bridge” can result when sellers over-value themselves based on an outdated view of their worth.

“After the past few years of high-profile cash deals, we are far more likely to see future transactions that rely less on cash and more on share swaps,” said Whelan.

The mid-tier players are generally the innovators as they devise “creative solutions for survival,” while the junior miners are the survivors focused on conserving cash, the paper says.

Another study released Tuesday by PricewaterhouseCoopers LLP found that the pace of merger and acquisition activity in the global metals industry declined “significantly” in the first quarter of 2009 due to the global recession, weak commodity prices and a difficult operating environment.

In the quarter, 18 deals were announced compared to 138 in 2008 and 142 in 2007.